What are the implications if the United States continues to issue massive amounts of Treasury bonds despite the debt crisis? What kind of ripples will be caused by the global asset pricing anchor reaching an all-time high?
The U.S. Department of the Treasury to issue $1 trillion in Treasury bonds
Despite the worsening debt crisis in the United States, the U.S. Department of the Treasury has not stopped issuing U.S. Treasury bonds. According to the latest data, the U.S. Department of the Treasury will issue more than $1 trillion in U.S. Treasury bonds over the three months of the third quarter.
The continuous roll-out of U.S. Treasury bonds, along with the Federal Reserve's policy of continued interest rate hikes, has also ignited the yield on U.S. Treasury bonds, causing its real interest rates to rise continuously, even surpassing the historical highs since 2008.
So, what impact will the series of policies from the U.S. Department of the Treasury and the Federal Reserve have? What does it have to do with us?
The U.S. Treasury Department issues another $1 trillion in Treasury bonds?
The matter must start with this U.S. debt crisis.
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In January of this year, the U.S. Department of the Treasury had already announced that it had reached the debt ceiling of $31.4 trillion. The Treasury Department had no right to issue Treasury bonds to fill its own financial accounts, leading to the imminent substantial default of the United States.
At the beginning of this year, the U.S. government debt had already reached the debt ceiling.
After a big show by the two parties in the United States, the U.S. debt ceiling crisis was temporarily resolved, so the U.S. Department of the Treasury had the right to continue issuing Treasury bonds to fill the fiscal gap. So, how much Treasury bonds does the United States need to issue to make up for the funds?According to the data, from July to September, the U.S. Department of the Treasury will issue over one trillion U.S. dollars in U.S. Treasury bonds, a figure that sets a historical high for the same period at the U.S. Department of the Treasury. In the following period from September to December, the U.S. Department of the Treasury will also go full throttle, with a net issuance of approximately 850 billion U.S. dollars.
Why is the U.S. Department of the Treasury issuing such a record-breaking amount of Treasury bonds on such a large scale? The main reason is still the "spiral trap" of the U.S. debt crisis.
As the Federal Reserve continues to raise interest rates, the U.S. government not only faces the pressure of high capital costs in the market, leading to increasing fiscal expenditures, but also has to face the huge interest payments brought by the 32.7 trillion U.S. dollars in debt.
How much is this amount? Data statistics show that in just one year, the U.S. Department of the Treasury will have to pay an additional 330 billion U.S. dollars in interest due to the Federal Reserve's interest rate hikes! This leads the U.S. Department of the Treasury to have to issue more and more U.S. Treasury bonds to maintain the government's expenditure plans.
In one year, the Treasury Department has to pay an additional 330 billion U.S. dollars in interest due to the Federal Reserve's interest rate hikes.
Therefore, it is a foregone conclusion that the U.S. national fiscal deficit will deteriorate within the next three years, and the U.S. will also have a net increase of 2.7 trillion U.S. dollars in debt this year, step by step falling into the "death spiral" of U.S. debt. If the U.S. does not have a president who can make a painful decision to reduce confrontation and contradictions with China, and focus on solving domestic economic and debt issues, then the U.S. fiscal system will collapse.
Then the collapse of the U.S. dollar hegemony will stem from the continuous increase in U.S. interest payments. Therefore, the Federal Reserve's interest rate hikes and the U.S. Department of the Treasury's continuous demand for funds are important reasons why the U.S. issues Treasury bonds indiscriminately. It's really not that Yellen wants to issue less, it's just that it has to be issued!
U.S. Treasury bond yields soar! What are the impacts?
Not only that, but the U.S.'s debt issuance and interest rate hikes have also had a violent impact on the U.S. 10-year Treasury bonds, which are known as the "anchor of global asset pricing."
According to market data, the yield of the 10-year U.S. Treasury bonds broke through the 4.3% mark during the trading day, successfully breaking the highest record since 2008. This means that the market has affirmed the expectation of future interest rate hikes by the Federal Reserve. In other words, the idea that experts previously judged that the interest rate hike in July would be the last has been rejected by the market.The yield on the 10-year Treasury bond has surged past 4.3%.
The continuous increase in U.S. Treasury yields implies a significant devaluation of U.S. Treasury bonds. This also indicates that China's decision to continuously sell off U.S. debt is correct.
Because if we continue to hold trillions of U.S. debt like Japan, the continuous devaluation of U.S. debt would also lead to a continuous shrinkage of China's foreign exchange reserves.
Therefore, in the coming months or even longer, China's action of selling U.S. debt is expected to continue.
So, what are the other impacts of the sharp increase in U.S. Treasury yields?
In fact, if the Federal Reserve continues to choose to raise interest rates to combat inflation, the economic suppression of countries around the world is obvious. Every time the Federal Reserve raises interest rates, countless people will lose their jobs, and countries around the world will also experience economic recession due to insufficient dollar liquidity.
The direct consequence of the Federal Reserve's continued interest rate hikes is economic recession.
If we look at it in detail, global stock markets will fall, and financial assets will depreciate. Why has the A-share market fallen more recently? It is also closely related to the recent hawkish statements from the Federal Reserve. After all, the U.S. stock market has also fallen quite a bit recently, and it is quite normal for the A-share market to fall a bit (although we didn't rise before).
In addition, the Federal Reserve's interest rate hikes will suppress the economies of European and American countries, leading to a decline in the purchasing power of European and American consumers, thereby reducing the demand for Chinese goods and affecting China's foreign trade export data. This will make it difficult for China to drive domestic economic growth through foreign trade exports, and it would be good enough if it does not drag down the GDP growth rate.
Therefore, whether it is the actions of the U.S. Treasury or the hawkish interest rate hikes of the Federal Reserve, they are a relatively large blow to the global economy and will also have a greater negative impact on China's economy.The Federal Reserve in a Dilemma
Is there a solution to the U.S. inflation problem that would allow the Federal Reserve to avoid raising interest rates? American economists have come up with an idea: they believe that the issue could be addressed by considering an increase in the U.S. inflation target.
For instance, if the current inflation rate in the United States is 2%, then raising it to 2.5% or even 3% could allow the Federal Reserve to postpone interest rate hikes, providing a significant buffer period for both the U.S. and global economies. This would make life less difficult for everyone. Some countries might even be able to avoid financial crises.
Prominent economists have pointed out that the experience of recent decades has shown that a 2% inflation target is not the correct figure; 3% is. Therefore, the Federal Reserve could consider raising the inflation target.
American economists believe that an inflation rate of 3% is appropriate.
It is evident that an increasing chorus is putting pressure on the Federal Reserve, hoping that it does not need to continue raising interest rates. The idea that July could be the last time for a 25 basis point interest rate hike is quite appealing.
However, the Federal Reserve has repeatedly stated its intention to keep inflation below 2%, and the core CPI in the United States remains high at 4.7%, making the Federal Reserve eager to raise interest rates again. As a result, the probability of another interest rate hike this year is growing, while the likelihood of easing and lowering rates is diminishing.
Interest rate hikes themselves lead to rising U.S. funding rates, which put immense pressure on the U.S. Treasury to make large interest payments when issuing government bonds. This contradicts the goal of resolving the U.S. debt crisis.
The Federal Reserve is in a dilemma.
Currently, the Federal Reserve is caught between a rock and a hard place. On one side, there is the unresolved inflation rate, particularly the core inflation rate. On the other side is the U.S. debt crisis. If U.S. government bonds continue to be issued at a funding cost of around 5%, it would impose a huge economic burden on the U.S. government!Summary
In general, the Federal Reserve is currently facing a dilemma: on one hand, surging inflationary pressures compel the Fed to raise interest rates to suppress inflation. On the other hand, the U.S. Treasury crisis is now inevitable, with the U.S. Treasury continuously issuing bonds to cover fiscal deficits, which in turn exerts greater pressure on the Federal Reserve.
More critically, should the Fed raise interest rates again, it will directly impact the global economic environment. From the United States itself to European countries, and from China to the rest of the world, all will bear immense economic pressure, affecting the employment, income, and livelihood of countless individuals.
The BRICS Summit in South Africa is about to commence!
At this very moment, a BRICS meeting led by China and Russia is set to take place in South Africa. One of the key topics of this meeting is to discuss and establish a monetary system independent of the U.S. dollar. The establishment of this monetary system will help us mitigate the negative impact of the Fed's arbitrary interest rate hikes on the global economy, particularly the Chinese economy.
Perhaps in the near future, we will witness an international currency akin to the euro being traded and circulated among BRICS countries, with China's renminbi becoming a world currency on par with the U.S. dollar!